LEISURE LETTER (08/25/2014)

Tickers: BYD, MAR, CCL, RCL

EVENTS

Aug 26: Horseshoe Baltimore Opening

Aug 27:

ISLE FQ1 2015, 11 am

BYI 2Q earnings

Aug 28: Hollywood Dayton Raceway Opening

Sept 1/2: Revel closes

COMPANY NEWS

BYD – announced the Boyd Bonus Tourney a slot dollar promotion running from Aug 24-31 at the following seven properties: The Orleans, Gold Coast, Suncoast, Sam’s Town, Main Street Station, California and Fremont. Awarded prizes will be in the form of Boyd Slot Dollars.

Takeaway: Promotions continue in LV Locals

HDRAU – Hydra Industries Acquisition Corp. (a "blank check" company) filed for an initial public offering. The offering is 10 million units, which are valued at $100 million U.S. The company plans on listing on the Nasdaq as HDRAU. The price for each of the securities is $10 U.S. and it consists of one share and one warrant, which is usually what you see with securities offerings in the world of blank check companies and special purpose acquisition vehicles. Each warrant allows for the purchase of one half of a share at $5.75 U.S. The management team is comprised of the chairman and chief executive officer, A. Lorne Weil, who built Scientific Games and has experience in the worldwide gaming and lottery markets. The sole book-running manager for the IPO is UBS Investment Bank, and the co-manager is EarlyBirdCapital Inc.

Takeaway: More gaming acquisitions coming?

1680:HK & 6889:HK – (GGRAsia) Dynam Japan Holdings Co Ltd extended a further six months the deadline for concluding talks with Macau casino services firm Macau Legend Development Ltd about possible collaboration on gaming operations. The Japanese company first agreed a non-binding memorandum of understanding with Macau Legend – led by former Macau legislator David Chow Kam Fai and running several casino and hotel operations in the territory – on August 23, 2013. That was extended in February this year for six months, and has now been rolled on to a new deadline of February 23, 2015. Dynam Japan invested approximately US$85 million in Macau Legend, including an initial purchase of US$35-million worth of shares following the latter’s global public offering in Hong Kong in July last year. In August last year, Dynam Japan announced that it hoped to operate a pachinko hall at Macau Legend’s waterside venue Macau Fisherman’s Wharf currently undergoing redevelopment on Macau peninsula.

Takeaway: Talks continue ahead of Japan debate in a couple of months

959:HK – Amax International Holdings Ltd said its chairman Ng Man Sun intended to sell 6.4 million of his shares in the firm to “not less than six” independent third parties. There will then be a top-up subscription of new shares under a general mandate, so that Mr Ng’s holding will be slightly diluted from 17.03% prior to this transaction to 16.57% afterwards. The transaction is expected to raise HKD7.56 million (US$975,500) net. Amax Holdings said the money raised would be used for “general working capital and potential investment.”

MAR – Opening in September, The Metropolitan at The 9 is affiliated with Marriott International's Autograph Collection. The hotel has 156 boldly designed rooms and suites. Additionally, residents of The 9 have the opportunity to choose from 104 spacious Concierge Living apartments

Takeaway: Another Autograph Collection asset.

CCL/RCL: Tropical Storm Cristobal Affects Cruise Itineraries

The following ships have had to alter their itineraries to avoid Cristobal:

RCL – EVP Maritime Harri U. Kulovaara acquired 35,948 shares of RCL via the exercise of five tranches of stock options awards and promptly sold 35,948 shares in a transaction that occurred on Thursday, August 21st at an average price of $63.8516. The five tranches of stock options would have expired in February 2015, 2016, 2017, 2019 and 2021. Following this transaction, Mr. Kulovaara now owns 32,905 shares in the company,

DRH – EVP & CFO Sean M. Mahoney sold 20,000 shares of stock via a 10b5-1 transaction on Tuesday, August 19th, at an average price of $13.25 and now owns 316,354 shares.

INDUSTRY NEWS

Smoking rules not to impact revenue classification: DICJ (GGR Asia)

The Macau gaming regulator says the new rules governing smoking inside the city’s casinos will have “no obvious impact” on the official breakdown of casino gross gaming revenue (GGR) into mass and VIP. “Gaming gross revenue is always listed and published by game types. On the other hand, DICJ Instruction No. 1/2014 and other rules on smoking set the criteria for smoking areas. As such, no obvious impact is expected in our gaming gross revenue classification after the new rules are in force,” the spokesperson said.

“DICJ will consider a baccarat table as a VIP one when it is designated to [a] particular group of players, on which non-negotiable chips [are] used and the bet is comparatively high,” the spokesperson added. The person did not define what was meant by “comparatively high” or precisely what was meant by “bet”, i.e., table minimum bet, table maximum bet, or maximum payout per table.

Takeaway: The regulator clarifies the reclassification rumors last week but there is still some vagueness distinguishing VIP from premium mass.

Dealer positions and wages(DSEC, GGR Asia)

The average monthly earnings for dealers at Macau casinos increased by 4.8% YoY to MOP17,530 (US$2,196) at the end of June this year, according to the latest Statistics and Census Service’s Survey on Manpower Needs and Wages of the Gaming Sector. There were 25,727 dealers in the city’s casinos as of June 30, +7.1% YoY. Dealers accounted for 45.4% of all employees in the gaming industry.

The growth in the average monthly dealer wage is however lagging monthly wage growth for the Macau gaming industry as a whole. Average earnings of full-time casino employees in June, excluding bonuses and allowances, rose by 6.7% YoY to MOP20,160, with resident and non-resident employees earning an average of MOP20,140 and MOP20,500 respectively. Full-time employees in the gaming industry totaled 56,700 at the end of 2Q 2014, an increase of 2,146 from a year earlier.

Takeaway: Labor will continue to be a risk for Cotai 2015/2016.

Macau July visitation – (DSEC) Visitor arrivals increased by 7% YoY to 2,753,394. Visitors from Mainland China increased by 13% YoY; Mainland visitors traveling under the Individual Visit Scheme rose by 19%, at 870,537. Visitors from Taiwan increased by 2% YoY, and those from the Republic of Korea and Indonesia soared by 24% and 55% respectively; however, visitors from Hong Kong decreased by 7%. The average length of stay of visitors was 1.0 day.

Takeaway: A mild surprise given all the negative mass talk lately.

Macau Gaming Concession – (GGR Asia) On Saturday, Macau’s Chief Executive, Fernando Chui Sai On, pledged to carry out a public consultation on the casino concession renewal process ahead of making any decision on the matter. The Macau government has stated several times that between the years 2015 and 2016 it intends to start examining the renewal of the concessions. Macau’s six casino concessions expire between 2020 and 2022. Mr Chui’s political manifesto stated casino operators should “facilitate the provision” of accommodation and transportation to their migrant workers, know locally as ‘non-resident workers’ or ‘blue card holders’. He has yet to elaborate on what that could mean.

Takeaway: Seemingly a less gaming operator friendly tone from the Chief Executive.

Takeaway: It will be interesting to see whether a low cost, non-gaming focused property can make it on the Strip. The success of the SLS boutique will hinge on marketing - can they achieve the cache of a hip and happening, boutique property.

Potential Nevada Sports Book Tax Repeal – Nevada sports book operators pay 0.0025% in a federal handle tax on every sports wager placed in the Silver State. In 2013, based on the record $3.6 billion wagered on college and professional sports, the amount sent to the IRS was $9 million. Representative Dina Titus (D-Nev) introduced a bill last month to repeal the tax. CG Technology, which operates race and sports books at eight Las Vegas hotel-casinos, paid about 25% of the state’s total handle tax burden.

Takeaway: Not material to any public company.

MACRO

Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive.

Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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